Circular Letter CVM/SNC/SEP No. 01/2017: Guidance on Relevant Aspects for Preparing Financial Statements for the Fiscal Year Ended December 31, 2016

SECURITIES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP Code: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

CIRCULAR LETTER/CVM/SNC/SEP No. 01/2017
Rio de Janeiro, January 12, 2017

Subject: Guidance on relevant aspects to be observed in the preparation of Financial Statements for the fiscal year ended 12.31.2016

Dear Investor Relations Director and Dear Independent Auditor,

The Circular Letters issued jointly by the Superintendence of Corporate Relations – SEP and the Superintendence of Accounting Standards and Auditing - SNC aim to guide the preparation of financial statements and have been considered an effective instrument by CVM’s technical areas to safeguard the quality of information disseminated in the market.

It is worth recalling that Circular Letters express the understanding of CVM’s technical areas regarding the adequate accounting representation of an economic event reflected in the financial statements of companies. Their topics originate from deviations identified and information obtained by CVM’s technical areas regarding transactions being structured by the market, throughout the fiscal year, for which these technical areas deem it convenient to alert the market to the position considered, as a rule, most appropriate.

In this sense, for the fiscal year ended 12.31.2016, the topics to be addressed are as follows:

1. “True and fair view”

2. “Forfait” transactions;

3. Transactions with FIP;

4. Transactions with FIDC;

5. “Impairment” tests – CPC No. 01;

6. Disclosures - Explanatory Notes;

7. Financial Instruments;

8. Revenue Recognition – POC: IFRS No. 15 x IFRIC No. 15;

9. Business Combinations;

10. Change in accounting practices.

11. “True and Fair View”
    It is never too much to recall that the two conceptual pillars on which accounting information rests are relevance and faithful representation. If accounting information is not relevant or does not faithfully represent the reality that must be reported, it should not be disclosed. The unsystematic application of IFRSs or their biased application leads to situations where the investor may be misled; situations where the investor is led to misinterpret a certain economic reality, whose reporting has been performed in a distorted manner. This is a situation that cannot be admitted for accounting information provided by public companies.

CVM has already expressed its concern with this aspect, namely: the risk of transactions and/or economic events being reported with exaggerated contours of their legal form. Not by chance, it issued Advisory Opinion CVM No. 37/2011, of 09.22.2011, which in summary always requires that “true and fair view” be observed in the accounting treatment to be granted. It is worth reproducing the following passage from the cited regulation:

“... the accounting standardizer expressly recognizes that accounting standards must be subordinate to the principles of true and fair representation (true and fair view) and the primacy of substance over form. That is, not only economic effects must prevail over form, regardless of legal treatment, but it is imperative, in the new accounting system, that the representation of economic reality be true and appropriate. So imperative that, even in the case of conflict with issued standards, the predominance must be of adequate representation. These are the central pillars of this new system.”

In this context, we still observe resistance regarding the application of “true and fair view”. Applying it implies exercising judgment; judging in exceptional and critical situations. And this posture is perfectly understandable, as professional risks increase enormously (especially litigation risks).

On the other hand, CVM is fully aware of the other side of the coin. And the following caveat must be made: the “true and fair override” provided for in accounting standards must not be used indiscriminately. It must be applied in extremely exceptional situations. And it can never serve to mislead; it cannot serve less noble purposes, such as managing accounting information.

In these exceptional cases, the role played by independent auditors is more justified than ever. Their capital importance lies in the quality of information to be disseminated in the market. Auditors must evaluate with diligence and skepticism these cases of “override”, whether the exceptional circumstance imposes its adoption or whether it is not the case for its adoption.

Nevertheless, it is never too much to recall that it is the primary responsibility of the company’s management and those responsible for governance to adopt accounting policies in conformity with the requirements of accounting standards.

If the adoption of the “true and fair override” is considered appropriate, wide and unrestricted disclosure must be given, as provided for in items 19 and 20 of Pronouncement CPC No. 26, reproduced below:

“19. In extremely rare circumstances, in which management concludes that compliance with a requirement of a Technical Pronouncement, Interpretation or Advisory Opinion of the CPC would lead to such misleading presentation that it would conflict with the objective of the financial statements established in the Conceptual Framework for Preparation and Disclosure of Financial Reporting, the entity will not apply this requirement and will follow the provisions of item 20, unless this procedure is strictly prohibited from a legal and regulatory point of view.

20. When the entity does not apply a requirement of a Technical Pronouncement, Interpretation or Advisory Opinion of the CPC or in accordance with item 19, it must disclose:
    (a) that management concluded that the financial statements appropriately present the financial position and equity, performance and cash flows of the entity; (b) that it applied the applicable Technical Pronouncements, Interpretations and Advisory Opinions of the CPC, except for the non-application of a specific requirement for the purpose of obtaining appropriate representation; (c) the title of the Technical Pronouncement, Interpretation or Advisory Opinion of the CPC that the entity did not apply, the nature of this exception, including the treatment that the Technical Pronouncement, Interpretation or Advisory Opinion of the CPC would require, the reason why this treatment would be so misleading and would conflict with the objective of the financial statements, established in the Conceptual Framework for Preparation and Disclosure of Financial Reporting, and the treatment actually adopted; and (d) for each period presented, the financial impact of the non-application of the Technical Pronouncement, Interpretation or Advisory Opinion of the CPC in force in each item in the financial statements that would have been reported if the unapplied requirement had been complied with.” (we emphasize)

It is imperative to state that CVM has a legal mandate to fulfill, namely: to ensure that all and any relevant information is provided faithfully, timely and equitably, in order to guarantee a fair formation of prices for financial assets traded in the market. Acting otherwise puts the health of the market at stake, increasing enormously the risk of adverse selection by investors. In this regard, “True and Fair View” – TFV or “True and Fair Override” - TFO, when well applied, is a valuable regulatory instrument.

2. “Forfait” Transactions
   During the 2016 fiscal year, some public companies spontaneously reapplied their financial statements with the aim of adequately reflecting the so-called “forfait”, “confirming” or “risco sacado” operations, or also called “securitization of accounts payable”1, through which the purchasing company, called the “anchor company”, contracts a bank and sets up with it a scheme for advance payment to its registered suppliers 2.

Formally, the selling company (supplier) issues an invoice that contemplates the term to be financed by the bank, but does not recognize the sale in its accounting at present value. And with this it presents a higher EBITDA. The purchasing company, for its part, does not recognize an onerous liability with the Bank, but the operating liability “suppliers”; its inventory is inflated and the gross margin with sales distorted.

With this expedient, the purchasing company manages to distort its real financial situation. It fails to recognize financial expenses in the result, as in addition to not recognizing the onerous liability “financing”, it does not adjust the “suppliers” liability to present value, when appropriate, without the proper segregation of interest embedded in the operation to be appropriated in the result, in accordance with Technical Pronouncement CPC No. 12. Balance Sheet - BS, Income Statement - IS and Cash Flow Statement - CFS fail to meet the condition of faithful representation.

The purchasing company is incentivized to proceed in this manner because it would be able to escape contractual “covenants” (interest coverage ratio or onerous indebtedness index, for example).

In short, what must definitely not occur is the distorted presentation of the transaction; economic substance must prevail over legal form. In the concrete case, it is unequivocal that there was financing of the purchasing company’s merchandise or capital goods by a banking institution. The onerous liability must be recognized as such in the balance sheet, and the debt service (interest and other charges) must be appropriated timely and exponentially in the result according to the effective interest rate curve. Thereby, common covenants such as: EBITDA/Indebtedness; EBITDA/Interest; Indebtedness/Equity are evaded.

It is worth remembering that some public companies can still be identified that, although they have specific platforms on the world wide web for registration and for guiding their suppliers on how to proceed to carry out “forfait” operations, disclosed nothing in terms of these operations in their financial statements, if they had transactions of this material nature.

1 Term coined by a representative of the Office of The Chief Accountant of USSEC, in a lecture delivered at the 2004 National Conference of the AICPA. “securitization of accounts payable”. (https://www.sec.gov/news/speech/spch120604rjc.htm) “Large company seeks credit to shield suppliers”. Valor Econômico Newspaper. 01.12.2016.

3. Transactions with FIP
   The transaction known in the Brazilian market with FIP, whose accounting treatment results in distortion of the information to be provided, concerns the sale of equity participation with an embedded swap contract.

This transaction is contractually defined in such a way that the controlling company, holding company or subholding, of an operating company alienates to an exclusive closed fund – FIP (in rule having a bank as a partner, but this configuration is irrelevant for the accounting treatment of the transaction) equity participation held in the operating company 3.

Additionally, the FIP and the holding company or subholding enter into a swap contract by means of which they will exchange future cash flows arising from the difference observed, on a future date, between the market sale value of the held equity participation - “fair value” - and the updated cost value of the held equity participation (CDI variation plus a spread, adjusted by distributed dividends) 4. The transaction of alienation in the market is made at the “fair value” of the held equity participation. Even to characterize that the “market view” was applied, in the concrete case, in pricing the held equity participation.

The FIP, for its part, intends to keep the acquired equity participation in the portfolio for a given period, say 5 years, after which it will place said lot on the market. If the sale of the equity participation to the market occurs below the updated cost of the held equity participation (purchase price updated by CDI variation plus a spread and discounted by distributed dividends), the holding or subholding (controller) must return the difference to the FIP. On the other hand, if the sale to the market occurs above the updated cost of the held equity participation, the profit will be shared between controller and FIP 5.

Formally, this transaction has been recognized in the accounting of the holding or subholding as an effective sale of equity participation, although the economic essence indicates that it is a financing transaction with an asset given as collateral (in this case, equity participation). For one, because there is, by the controller, continuous involvement and retention of substantial risks and benefits associated with the equity participation (the distributed dividends are deducted from the interest charged by the FIP and the eventual profit on the alienation is shared by the FIP with the controller), and for two, because the only risk to which the FIP is exposed is the credit risk of the controller (reflected in the spread practiced in the operation), in addition to having a guarantee that is the equity participation to be alienated in the market.

There is relevant distortion in the reported economic reality in this case. The controller fails to appropriately recognize the Result with Equity Method and held equity participation; the controller does not recognize the “Loans” Liability and the respective Financial Expense in the IS; the controller recognizes in a distorted manner and outside the appropriate competence period the capital gain or loss from the alienation of the equity participation. BS, IS and CFS fail to meet the condition of faithful representation.

3 This is an arrangement that can have other variants, such as the holding selling participation in the subholding, which in turn holds participation in the operating company.
4 Here too there may be other nuances. The FIP can be the issuer of a call option for the seller of the equity participation, whose exercise is motivated by an economic compulsion clause. Or the FIP can acquire (become holder) of a put option on the same equity participation acquired, whose issuer is the holding or subholding.
5 Once again, it is worth warning that there may be other nuances; other contractual arrangements. For example, the holding or subholding may have preference in the repurchase of the equity participation, a fact that is also irrelevant for defining the accounting treatment to be given to the transaction.

4. Transactions with FIDC
   Regarding the structuring of FIDCs known to us, some managers (banks) would be offering companies certain products, resulting in the “derecognition” of their assets (receivables), without the recognition of liability to which they would be subject 6.

The delineated proposal consists of an FIDC that would have an intermediate tranche between the senior tranches (which are placed in the market for qualified investors) and the so-called subordinated tranches, called Jrs. (which are fully subscribed by the assignor of the receivables). This intermediate tranche has been called the mezzanine tranche.

The subordinated Jr. tranche would represent a small portion of the FIP’s equity (2% for example), while the mezzanine tranche would represent a portion equivalent to the historical losses with default in the company’s receivables portfolio (7% for example). The subordinated mezzanine tranche would, in this case, be subscribed by a bank or by an investor, being a risky operation. On the other hand, very likely, the risk to which the bank would be exposed with the subscription of the subordinated mezzanine tranche would be included in the interest spread to be practiced when discounting the “alienated” receivables to the FIDC. The subordinated mezzanine tranches would have the following characteristics: absorb losses, only after eventual losses consume the subordinated Jrs. tranches. The subordinated junior tranches would be subscribed by the assignor of the receivables. The assignors would even commit to providing resources to the fund to serve as a “cushion”, to cover operating costs and other eventualities (portfolio default problems). After redemption and amortization of all tranches of the Fund, this “cushion”, if not used, would return to the assignor.

In essence, in the case at hand, the assignor would continue to retain the risks arising from the “alienated” receivables portfolio and would reap the economic benefits generated by it. Even if the assignment of credit rights is made without co-obligation, without right of recourse, which initially indicates a transfer of risks and benefits of the receivables by the assignor.

In essence, by subscribing the subordinated Jr. tranches, the assignor (company) would provide a guarantee. If the historical losses in the receivables portfolio well exceed the subordinated mezzanine tranches subscribed by the bank or by an investor, it is more than likely that the “cushion” provided by the assignor would be consumed. The assignor would retain a considerable portion of risk with portfolio default, for one because it would be paying in advance for the risk of the subordinated tranches, since the bank would discount the receivables at a rate contemplating a spread that would reflect the credit risk with the receivables. Thus, the alienated receivables would be “risk-adjusted”. For two because it would still be providing guarantees, by subscribing subordinated Jr. tranches, for an amount superior to the historical loss with the portfolio (the assignor offers a “cushion”, as already treated).

Furthermore, there would still be continuous involvement of the assignor with the transaction, since the remuneration of the senior, mezzanine or junior tranches would be by a post-fixed rate (CDI plus various spreads for each category of tranche), remuneration that would return to the assignor (holder of subordinated Jr. tranche, regardless of the name used), in case no default occurs.

6 It is also known of similar operations with CRAs (Agricultural Receivables Certificates), through which certain contractual arrangements are made that promote the emergence of a “fiduciary estate” (an economic entity, without CNPJ), in the mold of a “SILO” (IFRS 10).

For a definitive sale of receivables, the assignor cannot have any management, involvement, or future settlement with the titles sold to the FIDC. It cannot be exposed to the risks arising from the alienated asset nor can it reap the economic benefits generated by it. There should be, therefore, no “derecognition” of the asset (receivables) by the assigning company and there must be recognition of the liability, for the resources raised with the FIDC.

Objectively, for a sale of receivables to be definitive, company administrators must verify if the “derecognition” criteria provided for in CPC No. 38 (IAS No. 39) are being met. In addition, when a structured vehicle is used, it is up to the company’s administrators to judge whether there is a need to consolidate this vehicle entity.

5. “Impairment” Tests – CPC No. 01
   Considering the current economic scenario, still of economic contraction, with various external evidences suggesting uncertainties regarding the recovery of capital invested in assets, it is important to highlight the need to perform “impairment” tests for tangible and intangible assets, especially “goodwill” and, if the case, recognize impairment losses timely. After all, acquisitions of equity participations made 05 fiscal years ago, for example, indicative of future profits above what is expected currently, given the current economic context, will hardly present the same fundamentals.

Adequate disclosure must be provided in explanatory notes attached to the financial statements. In this sense, CPC No. 01, in its items 126-141, requires that certain disclosures be made that are relevant for the understanding of users of the financial statements. An example is the estimates used to measure the recoverable value (RV) of a cash-generating unit (CGU) that contains goodwill due to expectations of future profitability or intangible asset with indefinite useful life, whose book value is significant in comparison with the total book value of goodwill or intangible asset with indefinite useful life, recognized by the Company. For this specific situation of estimates, CPC No. 01, in its item 134, requires, among others, that the following be considered in the list of information to be provided:

(i) each key assumption on which management based its cash flow projections (if value in use is the basis for the RV of the CGU) or fair value methodology (if fair value less costs of disposal is the basis for the RV of the CGU).

(ii) description of the approach used by management to determine the value on which the key assumptions are based;

(iii) the period over which management projected cash flows and, when a period greater than five years is used for an estimate of value in use, explanation of why a longer period is justifiable;

(iv) the growth rate used to extrapolate cash flow projections, beyond the period covered by the most recent budget or forecast;

(v) the discount rate applied to cash flow projections; and

(vi) if a possible and reasonable change in a key assumption on which management has based its determination of the RC of the CGU could result in a carrying amount higher than its RC:

• the amount by which the RC of the CGU exceeds its carrying amount;
• the value on which the key assumption is based; and
• the new value on which the key assumption must be based, after incorporating any effects derived from this change in other variables used to measure the recoverable amount, in order for the RC of the CGU to equal its carrying amount.

We draw attention to the need to observe the bases for estimating future cash flows, which are described in items 33 to 38 of CPC n. 01, mainly with regard to the reasonableness and substantiation of the projections used, taking into account, among other aspects, the budgets approved by the Company's management and the consistency with the results presented in the past.

Additionally, we emphasize that the recoverable amount must be estimated for the individual asset and, "if it is not possible to estimate the recoverable amount for the individual asset, the entity must determine the recoverable amount of the cash-generating unit to which the asset belongs," as verified in item 66 of CPC n. 01.

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect in a relevant manner the

6. Disclosures - Explanatory Notes
   6.1. Application of item 38 of OCPC 07

The positive effects of the application of Orientation CPC 07 - Disclosure in the Financial Reporting of General Purpose, approved by CVM Deliberation n. 727/14, although incipient, could already be perceived when preparing the financial statements for the fiscal year ended 31.12.2014. Certainly, there is still much to advance in its application and the consequent improvement in the quality and volume of the explanatory notes.

However, a point identified as absent in most of those statements concerns the mandatory application provided for in item 38 of the aforementioned orientation:
“38. The entity's management must, in the statement of compliance, affirm that all relevant information specific to the financial statements, and only that information, is being disclosed, and that it corresponds to the information used by it in its management.” (we underline)

Thus, it is relevant to recall this obligation for the management of the publicly-held company to sign a statement of compliance, in accordance with item 38 of OCPC 07, reproduced above.

6.2. Elucidative vs. Non-Elucidative Explanatory Notes

The topic of disclosure in explanatory notes is recurrent and has been the object of constant monitoring by the CVM's technical areas. The adoption of IFRSs in our domestic regulatory environment promoted a considerable increase in the volume and complexity of the explanatory notes attached to the financial statements of publicly-held companies. Professional and academic forums have been held with the purpose of discussing the problem and seeking solutions.

Excessive and unreasonable volumes of information consume time and resources of preparers and users of financial statements, a fact that compromises the effectiveness of disclosure. The critical issue that arises is: What is the ideal cut-off point and what is the appropriate formatting for the type of disclosure intended to be made?

What continues to be observed is the legalistic and formal character with which the subject has been treated by the management of some companies, whether under pressure from their independent auditors or not. The so-called “check-list” approach, according to which the information required by a CPC Technical Pronouncement must be provided, even if it does not constitute relevant information for the company reporting it.

The CVM's technical areas understand that informing in a non-elucidative manner and mentioning a subject that has no relevant repercussion on the financial statements of the company reporting the information is providing a disservice. Information to be provided in an explanatory note, as a rule, must be relevant, elucidative, and complementary (not substitutive) to the prepared financial statements.

In this sense, the guidance to be given is that the administrators of publicly-held companies effectively exercise a value judgment regarding what should be disclosed in an explanatory note, considering the prevailing disclosure requirements. What is relevant and appropriate in terms of information for users of financial statements to be able to make the best decision between holding, acquiring, or alienating securities.

It is true that by abandoning a “checklist” approach in favor of a judgment-based approach, the preparers of financial statements incur a higher cost, as they must now justify their choices to their independent auditors and potentially to the Regulator. It is the cost incurred when exercising judgment and applying materiality criteria to “disclosure” requirements7.

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect in a relevant manner the

It is worth emphasizing that the auditor seeks to evaluate whether the information required in a pronouncement is being met, with the management of the company establishing the level of disclosure it deems appropriate. Thus, if the company wishes to provide more information, without prejudice to the minimum quantitative and qualitative disclosures, it is not up to the auditor to modify its opinion due to this fact.

7 A good accounting policy can help reduce costs in this regard, by parameterizing some measures and defining ex-ante the procedures to be followed in the disclosure process for financial reporting purposes. Ideally, the accounting policy should also be submitted to the scrutiny of independent auditors during the planning phase of their work and archived with the Regulator via FR (giving it wide publicity).

6.3. Sources of Uncertainty

CPC n. 26, which deals with the presentation of Financial Statements, in its items 125-133 provides guidance regarding sources of uncertainty in estimates, for which adequate disclosures must be made by the company's management.

In its item 125, it is written as follows:
“125. The entity must disclose, in the explanatory notes, information regarding assumptions about the future and other main sources of uncertainty in estimates at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities over the next fiscal year. With respect to these assets and liabilities, the explanatory notes must include elucidatory details regarding:
(a) their nature; and
(b) their carrying amount at the end of the reporting period.”

And in item 129 of CPC n. 26, the following guidance is given:
“129. The disclosures described in item 125 must be presented in a way to help users of the financial statements understand the judgments that management has made regarding the future and about other main sources of uncertainty in estimates. The nature and extent of the information to be disclosed vary according to the nature of the assumptions and other circumstances. Examples of these types of disclosures are as follows:
(a) the nature of the assumptions or other uncertainties in the estimates; (b) the sensitivity of the carrying amounts to the methods, assumptions, and estimates underlying the respective calculation, including the reasons for this sensitivity; (c) the expected resolution of uncertainty and the variety of reasonably possible outcomes over the next fiscal year regarding the carrying amounts of the impacted assets and liabilities; and (d) an explanation of changes made to the assumptions adopted in the past regarding these assets and liabilities, if the uncertainty remains unresolved.”

The CVM's technical areas understand that these disclosures are particularly relevant when they involve estimates for material amounts of provisions in general (for contingencies arising from administrative or judicial actions, for dismantling of long-maturing assets, among others), for asset recovery values, for fair values in general, and for long-term obligations with a high degree of uncertainty (such as post-employment benefit obligations).

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect in a relevant manner the

6.4. Management's Judgment of the Company – “Going Concern”

CPC n. 26 in its items 25-26 emphasizes that the entity's financial statements must be prepared on the assumption of its continuity. When management becomes aware, in making its assessment, of relevant uncertainties related to events or conditions that may cast significant doubt on the entity's ability to continue operating in the foreseeable future, these uncertainties must be disclosed.

The IASB's Interpretations Committee, IFRIC, in July 2014, positioned itself regarding the topic “disclosure requirements related to the assessment of the entity's continuity,” understanding that even if the company's management concludes that there are no material uncertainties casting doubt on the continuity of the entity - “going concern” - the bases of judgment that allowed it to reach this conclusion involved significant value judgment. These bases must be widely disclosed8.

In this sense, the CVM's technical areas highlight the importance of the administrators of companies making this judgment and proceeding with its adequate disclosure. It is important to mention, still in this context, that the new audit report will highlight in more detail the management's responsibilities regarding the assessment of continuity.

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect in a relevant manner the audited financial statements as a whole. In this regard, it is worth emphasizing that auditors must observe NBC TA 570 – Going Concern.

6.5. New Accounting Standards: CPC n. 47, CPC n. 48 and IFRS 16

Considering the entry into force of new accounting pronouncements, scheduled for fiscal years beginning on January 1, 2018 (CPC n. 47 and n. 48) and January 1, 2019 (IFRS n. 16), the administrators of the affected publicly-held companies must evaluate and consider the potential impact of these new standards on the company's financial statements.

Although IFRSs provide for early adoption as an option for the administrators of companies, in Brazil, regulatory entities, and in the specific case of the capital market, CVM, have prohibited this early adoption, to safeguard comparability between companies in the same sector.

In this sense, CPC n. 23, in its items 30-31, requires that some disclosures be made, when there is no early adoption (in the Brazilian case, this applies to all companies). Below are produced the aforementioned normative devices:

(…) the Interpretations Committee discussed a situation in which management of an entity has considered events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. Having considered all relevant information, including the feasibility and effectiveness of any planned mitigation, management concluded that there are no material uncertainties that require disclosure in accordance with paragraph 25 of IAS 1. However, reaching the conclusion that there was no material uncertainty involved significant judgement. The Interpretations Committee observed that paragraph 122 of IAS 1 requires disclosure of the judgements made in applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. The Interpretations Committee also observed that in the circumstance discussed, the disclosure requirements of paragraph 122 of IAS 1 would apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. (we underline)

“30. When the entity does not early adopt a new Pronouncement, Interpretation, or Orientation already issued but not yet mandatory for application, the entity must disclose:
(a) such fact; and
(b) information available or reasonably estimable that is relevant to assess the possible impact of the application of the new Pronouncement, Interpretation, or Orientation on the entity's financial statements in the period of initial application.
31. In complying with item 30, the entity must proceed to disclose:
(a) the title of the new Pronouncement, Interpretation, or Orientation; (b) the nature of the change or changes in accounting policy; (c) the date when the application of the Pronouncement, Interpretation, or Orientation is required; (d) the date when it plans to initially apply the Pronouncement, Interpretation, or Orientation; and (e) the assessment of the impact that the initial application of the Pronouncement, Interpretation, or Orientation is expected to have on the entity's financial statements or, if this impact is not known or reasonably estimable, the explanation regarding this impossibility.” (we underline)

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect in a relevant manner the

7. Financial Instruments
   7.1. Application of the Concept of “Economic Compulsion”

It has been observed, among some agents, the understanding, in a very tight synthesis, that economic compulsion should not be taken into consideration for the purpose of classifying financial liabilities (distinction between liability and equity elements). This understanding would reside in a supposed manifestation of the IFRIC, in a consultation formulated for the Committee in the year 2006 (IASB Update June 2006, p. 4).

The technical areas conducted research on the IFRIC's positions and concluded that decisively there was no manifestation whatsoever by the IFRIC in 2006, but rather the discussions carried out by the interpretive committee (which is worth noting, does not create standards) were reported to the IASB Board. And the IASB Board deemed it appropriate to assert two things: (1) for the purpose of qualifying an item as a financial liability, contractual obligations established explicitly or implicitly (economic compulsion), through the terms and conditions of the financial instrument, must be considered. Economic compulsion, by itself (in isolation), cannot be used for the purpose of classifying a liability item; (2) the IASB Board emphasized the

what is obvious, and already present in much of its standards, IAS 32 requires an evaluation of the economic substance of the contractual arrangement.

IAS 32 (RedBook, “consolidated with full early application”, 2015), in its §20, deals with economic compulsion in the qualification of a Financial Liability, defining direct and indirect obligations in terms and conditions of contracts. In the “Basis for Conclusions” section, §BC9, the IASB Board unravels the controversy arising from the mentioned device. In broad lines, the IASB Board manifests itself in the sense that it admits the prevailing understanding that a financial instrument can establish an obligation indirectly through its terms and conditions (“Implicit obligations”, §20).

It does not seem economically sensible for obligations contractually transformed into rights; formally characterized as options subject to the issuer's free will. The obligation to deliver cash, to satisfy the payment of dividends or interest, becomes an option to be exercised by the issuer. And what about the holder of the security? Does it run risks without a premium in return? It does not seem to make much sense, within an economic rationality.

It is also interesting to bring to light the “staff paper” produced by the IASB technical body, dated March 18-22, 2013, titled: “Guidance to support the definition of a liability— economic compulsion, constructive obligations and contractual obligations”.

From reading the reproduced passages from the “staff paper”, two are the conclusions:
(1) some market agents are encouraging issuers to treat debt instruments as equity instruments, classifying them in Equity - E, thereby distorting the economic reality to be reported and (2) such procedure seems to be on the radar of the IASB technical body.

As already emphasized in Circular Letter CVM/SNC/SEP/n. 01/2013, the CVM's technical areas have great concern with this issue, the distinction between a liability item and E, especially considering the creativity, quality, and sophistication of new financial products, whether they are classified as Composite Financial Instruments9 or not. This practice is observed particularly in the current moment when some companies present a high degree of indebtedness, the costs to raise capital are high, and the reduction of the level of economic activity is a reality. There is, so to speak, a favorable environment for issuers to practice the already named “capital structure management”, a procedure inadmissible by CVM, given its already mentioned legal mandate.

9 A composite instrument is a non-derivative instrument that contains elements of liability (“liability”) and equity (“equity”).
IAS32, §§ 28-32, AG30- AG35.

7.2. Hedge Accounting – CPC n. 38/IAS n. 39 and CPC n. 48/IFRS n. 09

With the entry into force, from the fiscal year beginning on January 1, 2018, of CPC n. 48, which mirrors IFRS n. 9 in Brazil, two “hedge accounting” models will coexist simultaneously: the CPC n. 38 model and the CPC n. 48 model10.

In short, the “hedge accounting” model becomes another accounting choice for management: either it chooses Chapter 6 of IFRS 9 or maintains the provisions of IAS 39, applicable to the matter. And the models are distinct (IFRS 9 x IAS 39), in terms of designation of hedge relationships, eligible objects for the hedge, and effectiveness tests. By way of illustration, the table below identifies some differences between the two models:

IAS n. 39	IFRS n. 09
Prospective and retrospective hedge effectiveness (“threshold” 80%-125%)	Prospective hedge effectiveness: “forward-looking model” (§§ B.6.4.12, §§BCE198-BCE199)
Non-derivative FI as hedge instrument only for foreign currency risk factor	Non-derivative FI as hedge instrument for other risk factors, if measured at FVTPL (§§BCE189-BCE190)
Maturity differences allowed between hedge FI and hedge object, when inferior (hedge FI “rollover” policy permitted). However, maturity of hedge FI superior to hedge object is prohibited.	No mention, s.m.j., of maturity differences.
Adjustments to hedge relationships prohibited, subsequently to designation, with the exception of “rollover” policy.	Adjustments to hedge relationships permitted, subsequently to designation, without being considered “discontinuation” of the original hedge relationship (§§BCE200-BCE201)
Indication of net positions as hedge object prohibited	Indication of net positions as hedge object admitted (it is not macro-hedge)
Applicable to fair value hedge for static interest rate portfolio macro hedge	Not applicable to fair value hedge for static interest rate portfolio macro hedge. In this case use IAS n. 39

“Hedge accounting” is an optional accounting policy that allows eliminating or reducing volatility in results, and when applied it must observe specific rules and should not be

10 EXCERPTS FROM IFRS n. 9 – HEDGE ACCOUNTING:
IN10. In November 2013 the IASB added to IFRS 9 the requirements related to hedge accounting. These requirements align hedge accounting more closely with risk management, establish a more principle-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. In its discussion of these general hedge accounting requirements, the IASB did not address specific accounting for open portfolios or macro hedging. Instead, the IASB is discussing proposals for those items as part of its current active agenda and in April 2014 published a Discussion Paper Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply. The IASB also provided entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 or continuing to apply the existing hedge accounting requirements in IAS 39 for all hedge accounting because it had not yet completed its project on the accounting for macro hedging. (we underline)
6.1.3 For a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities (and only for such a hedge), an entity may apply the hedge accounting requirements in IAS 39 instead of those in this Standard. In that case, the entity must also apply the specific requirements for the fair value hedge accounting for a portfolio hedge of interest rate risk and designate as the hedged item a portion that is a currency amount (see paragraphs 81A, 89A and AG114–AG132 of IAS 39). (we underline)
7.2.21 When an entity first applies this Standard, it may choose as its accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in Chapter 6 of this Standard. An entity shall apply that policy to all of its hedging relationships. An entity that chooses that policy shall also apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without the amendments that conform that Interpretation to the requirements in Chapter 6 of this Standard. (we underline)

used as a means to legitimize the deferral of exchange losses nor earnings management.
The Accounting Pronouncements Committee – CPC took a position, as deliberated in an Ordinary Meeting held on 04.11.2016 and detailed in items 5 and 6 of the CPC 48 public hearing report, that it will evaluate the relevance and timeliness of restricting this accounting choice by open companies, as previously observed in situations where a standard provided for more than one accounting choice, at the discretion of the companies' management. The great concern in this specific case concerns the loss of comparability that may occur with the coexistence of two distinct models of "hedge accounting".

7.3. "Impairment" Test of Financial Instruments – CPC n. 48/IFRS n. 09
With the entry into force, starting from the fiscal year beginning on January 1, 2018, of CPC n. 48, in addition to a new model of "hedge accounting", a new approach for "impairment" of financial instruments is also being proposed. The incurred loss approach is abandoned and the expected loss approach is elected.

There are still, within the expected loss approach, two proposed models: a more robust and complex, probabilistic model, called the 3-stage model, aimed primarily at financial institutions, according to which the credit deterioration of the asset issuer calibrates the amount of expected losses, thereby promoting a smoothing of results. And another simpler model, generally recognized by the market as the "aging list" model, aimed primarily at non-financial institutions, according to which the amount of expected losses is defined ad hoc, according to delays observed in the receivables portfolio, by intervals.

The 3-stage model can be illustrated in the figure below.
Expected loss model ("expected credit loss"):
Expected Loss/Default for the next
12 months
Expected
Loss/Default for entire life of FI
Effective interest rate on amortized cost of FI (without "impairment" adjustment) Effective interest rate on amortized cost of FI (without "impairment" adjustment) Effective interest rate on amortized cost of FI (with "impairment" adjustment) Recognition of Expected Loss:
Recognition of
Interest Income:
Stage 1 Stage 2 Stage 3
Deterioration in credit quality since original recognition Expected Loss/Default for entire life of FI

The "aging list" model is reproduced below, based on illustrative example n. 12 of the standard.

Simplified Approach – "Lifetime expected credit loss":
commercial receivables or contractual assets, within the scope of IFRS n. 15 and lease receivables, within the scope of IAS n. 17 [IFRS9, 5.5.15] Provision Matrix ("Aging List") Current Up to 30 days 31 to 60 days 61 to 90 days more than 90 days "Default rate" 0.30% 1.60% 3.60% 6.60% 10.60% Cost LTECLA Current 15,000,000 45,000 Up to 30 days 7,500,000 120,000 31 to 60 days 4,000,000 144,000 61 to 90 days 2,500,000 165,000 more than 90 days 1,000,000 106,000 Total 30,000,000 580,000 1.93% Receivable Delay Receivable Illustrative Example n. 12, IE74-IE77

What is relevant to highlight is that the 3-stage model, although aimed primarily at financial institutions, can and should be used by non-financial institutions, if better quality information is to be produced, when the non-financial institution has a portfolio of commercial receivables, within the scope of CPC n. 47/IFRS n. 15, that contains a significant financing component. As CPC n. 48 well points out, in its item 5.5.15, letter "a" "ii", the election of the 3-stage model or the "aging list" model becomes an accounting choice of the company's management.

A sector that can potentially avail itself of the 3-stage model, in the view of the technical areas of CVM, due to its characteristics, is the real estate development sector, holder of a portfolio of commercial receivables, within the scope of CPC n. 47/IFRS n. 15, with a significant financing component.

Still regarding the "impairment" test, for the fiscal year ending on 31.12.2016, those open companies that have in their financial asset portfolios some securities issued by companies that are in judicial reorganization, shall proceed with the "impairment" test, according to the dictates set forth in CPC n. 38.
This subject becomes extremely delicate and gains relevance with the current economic scenario, still in contraction.
Independent auditors must be attentive to these aspects, manifesting themselves in their reports issued regarding deviations that in their judgment affect in a relevant way the

8. Revenue Recognition – POC: IFRS n. 15 x IFRIC n. 15
   With the entry into force, in the fiscal year beginning on January 1, 2018, of the new Technical Pronouncement CPC n. 47, mirrored in IFRS n. 15, the revenue recognition of contracts with customers will have a new regulatory discipline, based on the transfer of control of a good or service, whether this transfer is observed at a specific moment ("at a point in time"), whether this transfer is observed over time ("over time"), according to the satisfaction or not of the so-called contractual "performance obligations". It is important to highlight the provision in item 33 of CPC 47, which specifies the fundamental characteristics for the existence of control over an asset:

9. (..). Control of the asset refers to the ability to determine the use of the asset and to obtain substantially all of the remaining benefits arising from the asset.
   Control includes the ability to prevent other entities from directing the use of the asset and obtaining benefits from this asset. The benefits of the asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly (...)
   It is the understanding of the technical areas of CVM that the adoption of one or the other accounting practice will be a function of adequate contractual analyses by the company's management, in line with the dictates of the standard. For the specific case of the real estate development sector, the maintenance of the revenue recognition method called POC or the adoption of the keys method, for example, will result from this evaluation. In this regard, among the list of regulations to be revoked with the entry into force of the new pronouncement, it is worth highlighting ICPC n. 02 – Construction Contracts of the Real Estate Sector, mirrored in IFRIC 15, which caused much controversy and discussion in the Brazilian regulatory environment, resulting even in OCPC n. 4 – Application of Interpretation 02 to Brazilian Real Estate Development Entities. It is verified that it is common practice in the sector that the percentage of evolution of the work is ascertained from the percentage of cost incurred in relation to the total budgeted cost for the undertaking. This criterion requires the administrators of the companies to adopt the necessary measures so that the internal controls regarding the preparation and continuous and timely review of construction budgets and their integration with the accounting system are adequate to such procedure. Attention is called, given the relevance of the mentioned controls, to the fact that, as a rule, any deficiencies and recommendations regarding internal controls, regarding construction budgets and revenue recognition, present in the detailed report prepared by their independent auditors, must be reported in section 5.3 of the Reference Form. Regardless of whether the auditors have pointed out deficiencies or suggested recommendations, the administrators must comment on the degree of efficiency of such controls, indicating any measures adopted for their improvement. Furthermore, due to the revenue recognition criterion by the percentage of completion (POC) method and due to possible variations in the predictability of construction budgets, which may lead to the need for adjustments in the values recognized as revenues, the company must present, in an explanatory note, the value relating to results to be appropriated, informing the value of sales made and the respective costs to be incurred (or construction commitments) not reflected in the accounting statements. The Accounting Pronouncements Committee - CPC, in 2016, constituted a working group – GT destined to evaluate the impacts of the new standard on the Real Estate Development sector. Said group was constituted by representatives of the profession – CFC, from academia - FIPECAFI, from independent auditors - IBRACON, from open companies - ABRASCA, from companies in the sector – ABRAINC and from CVM. The results of the discussions and recommendations were forwarded to the CPC, which in a meeting dated 02.12.2016 decided by majority to take a position in the
   sense that the revenue recognition method called POC or the method called keys is perfectly aligned with IFRSs, depending on the contractual analyses of each operation. The technical areas of CVM, especially the Superintendence of Accounting Standards and Auditing, assert that with this outcome, and upon full enforcement of CPC n. 47/IFRS n. 15, it will no longer be possible to admit audit opinions with reservations or emphasis paragraphs that question the alignment of POC with international accounting practices, for the real estate development sector. A high level of defaults observed in the sector, or even the non-existence of a reliable and effective internal control system, do not call into question the POC method itself, but rather the recognition or not of revenue. This recognition is conditioned by the degree of reliability regarding the fluidity to the entity of the cash flows generated from the recognized revenue. It is important to highlight this issue, as it is the reason for CVM to ensure the quality of information that is to be disseminated in the market, avoiding that users in general, investors and other stakeholders are induced to error.

10. Business Combinations
    9.1. Business Combinations when there is remaining participation of non-controlling shareholders, with simultaneous issuance of put options and call options on these shares 11
    Recently, acquisitions of structured entities have been observed in the following manner:

• acquisition of a percentage of shares sufficient to obtain control;
• simultaneous issuance of put options (from the acquirer to the remaining/non-controlling shareholders) and call options (from the remaining/non-controlling shareholders to the acquirer) on a percentage of shares not acquired (in concrete cases acquisition of the remaining balance);
• generally the exercise price of the options (call and put) takes as reference a multiple of adjusted EBITDA.
  It is emphasized that the accounting treatment for put and call options issued on the remaining participation of non-controlling shareholders fits into a situation of absence of specific standard, scenario in which Management must select an accounting policy that results in relevant accounting information with faithful representation (CPC 23, item 10).
  For the selection and application of accounting policies, CPC n. 23 (items 11 and 12) provides for the following hierarchy: 1) CPC approved documents that deal with similar subjects; 2) criteria and concepts contained in the Conceptual Framework; 3) other sources, for example, standards issued by other standard-setting bodies, provided they are not conflicting with items 1 and 2. In any case, detailed disclosures must be made regarding the judgments made by Management during the process of selecting the appropriate accounting policy. Among the various points to be considered in defining the accounting policy, the following deserve emphasis:
  i) thorough analysis regarding the moment of transfer of substantive rights linked to remaining shares in the hands of non-controlling shareholders, with detailed disclosures regarding the judgments made; ii) justification of the understanding that the recognition and measurement of equity items in the individual and consolidated statements (assets, liabilities, equity) faithfully represent the economic substance of the transaction; and iii) the use of goodwill/badwill account in capital transactions, in the exercises of the options, instead of the Asset Valuation Adjustment account, as provided in item 69 of ICPC n. 09. Finally, it is highlighted that the IASB project "Financial Instruments with Characteristics of Equity – FICE" is underway. With the completion of this project, the expectation is that there will be a regulatory provision in the IFRSs that deals with options issued on Non-Controlling Interests - NCI.

11 In international literature the expression "NCI put" (Non-controlling interests put options) is commonly used, although usually both put ("put") and call ("call") options are issued.

9.2. Measurement Period - "Goodwill" or Gain from a Bargain Purchase
The measurement period for business combination operations, given the complexity involved and sometimes the precariousness of available information, contemplates, as provided in CPC n. 15, a period of up to one year.
It is important to emphasize that this one-year provision is for the initial accounting to be completed, when there is a lack of relevant information on the date of initial recognition.
It is relevant to reproduce below CPC n. 15, in its item 45.
"When the initial accounting of a business combination is incomplete at the end of the reporting period in which the combination occurred, the acquirer must, in its financial statements, report provisional values for items whose accounting is incomplete. During the measurement period, the acquirer must retrospectively adjust the provisional values recognized on the acquisition date to reflect any new information obtained regarding facts and circumstances existing on the acquisition date, which, if known on that date, would have affected the measurement of the recognized values. During the measurement period, the acquirer must also recognize additional assets or liabilities, when new information is obtained regarding facts and circumstances existing on the acquisition date, which, if known on that date, would have resulted in the recognition of those assets and liabilities on that date. The measurement period ends as soon as the acquirer obtains the information it was seeking about facts and circumstances existing on the acquisition date, or when it concludes that more information cannot be obtained. However, the measurement period cannot exceed one year from the acquisition date." (we underline) Still regarding the measurement period, CPC n. 15, in item B67, "a", requires that the following information be disclosed in the explanatory notes, when the accounting of the business combination is incomplete:
"When the initial accounting of a business combination is incomplete (see item 45) and, consequently, certain assets, liabilities, non-controlling interests or items of consideration transferred, as well as the respective amounts recognized in the financial statements for the combination, have been determined only provisionally, the following must be disclosed:
(i) the reasons for why the initial accounting of the business combination is incomplete; (ii) the assets, liabilities, equity interests or items of consideration transferred for which the initial accounting is incomplete; and (iii) the nature and amount of any adjustment in the measurement period recognized during the reporting period, in accordance with the provision of item 49".

Independent auditors must be attentive to these aspects, manifesting themselves in their reports issued regarding deviations that in their judgment affect in a relevant way the

9.3. CVM Instruction n. 319/99 x ICPC n. 09
Some market agents have consulted the technical areas of CVM to know how to proceed regarding the accounting treatment to be adopted for reverse mergers, given the command of ICPC n. 09, in its item 77, after the second revision to which it was submitted.
It is important to highlight that said device deals with transactions between entities under common control in general, not being circumscribed exclusively to business combinations between entities under common control nor to reverse mergers. Thus item 77 directs:
"77. While the Accounting Pronouncements Committee does not issue a Technical Pronouncement or Interpretation comprehensive that disciplines the way in which transactions between entities under common control must be treated (for which reason items 44 to 47 were suppressed), the existing regulation by the entity's regulatory body must be applied." (we underline) In Brazil, the subject of business combinations between entities under common control has always had much of its economic motivation supported by tax planning. Corporate reorganizations that aim, sometimes exclusively, to reduce the tax burden of companies, through the opportunity for tax avoidance offered by tax legislation. A widely practiced operation in our environment, which received designations in the specialized literature of the area as "reverse merger" or "reverse merger" of 2nd generation, had the primary objective of creating internal goodwill 12, an unrealized profit in a transaction with equity participations. Internal goodwill, for the purposes of individual and consolidated financial statements, is prohibited by international accounting standards. And it simply does not exist because the goodwill generated internally and recognized by one of the companies involved originates from the capital gain or profit recognized by another of the companies involved. There are no independent third parties in the case, interested in practicing an operation without favors, validating the goodwill. CVM in the past, in the 1st generation of "reverse merger" or "reverse merger" operations, with goodwill validated by independent third parties, did discipline the issue within the scope of open companies, with a view to preventing non-controlling shareholders from being prejudiced in dividends to which they would be entitled. Thus was the obligation to constitute the provision for asset integrity, created by CVM Instruction n. 319/99, modified by CVM Instruction n. 349/01. Thus was also the prohibition of capitalizing the special goodwill reserve without the corresponding amortization of the goodwill that gave rise to it.

12 These operations found support in tax legislation, Law 10.637/02, art. 36, a provision already revoked by Law 11.196/05.
Audits by the Brazilian Federal Revenue Service – RFB on these operations even reached administrative courts – CARF (http://carf.fazenda.gov.br/sincon/public/pages/index.jsf), questioning the fiscal deductibility of internal goodwill (on this subject see 1402-01.080 Ruling, 1402-01.078 Ruling, 1201-000.689 Ruling, 1101-000.710 Ruling, 1101-000.709 Ruling, 1101-000.708 Ruling).

By reviewing the Technical Pronouncement CPC n. 15, mirrored in IFRS 3, which deals with business combinations, it is found that the subject of business combinations between entities under common control is outside its scope (CPC 15, item 2c and items B1-B4). Nor has the IASB disciplined, so far, the way in which such operations must be treated accounting-wise. The Accounting Pronouncements Committee in 2015 created a working group to deal with these operations - GT transactions between entities under common control - which has not yet taken a position on the subject. The technical areas of CVM, with the understanding guided by the principle of "substance over form" (CVM Orientation Opinion n. 37/2011), and supported by the orientations given by CPC n. 36 regarding change of control and in CPC n. 15 itself, advocate for the analysis of a business combination considering a broad view. Even if there is no corporate control relationship between the companies involved in the combination, but if they are subject to the same corporate control, such an operation is not within the scope of Technical Pronouncement CPC 15. For the technical areas of CVM, it is appropriate to apply the "Predecessor Cost Basis" method when a business combination between entities under common control is at stake. Regarding the provisions of CVM Instruction n. 319/99 aimed at the accounting treatment of reverse mergers, these remain fully in force and must be applied when the concrete case involves a reverse merger, in the manner then disciplined. The administrators of the companies involved together with their legal consultants and independent auditors must evaluate the relevance and timeliness of applying said provisions of the standard. However, in cases where there is no interposition of a "vehicle" company, the original investor being merged, and where the economic foundations that gave rise to the goodwill remain valid, the same should be maintained in its entirety and amortized under the conditions and deadlines originally established. In this case, the constitution of the provision mentioned in CVM Instruction n. 349/01 may be unnecessary or even improper. It is worth noting that the exception mentioned above should not be understood in a generalized way. There may be situations where, even if a "vehicle" company has not been created, there may be the recognition of an asset and an increase in equity without economic substance, a fact that imposes the need to constitute the provision determined by CVM Instruction n. 349/01. Independent auditors must be attentive to these aspects, manifesting themselves in their reports issued regarding deviations that in their judgment affect in a relevant way the

10. Change in Accounting Practices

Technical Pronouncement CPC n. 23 defines criteria for the selection and change of accounting policies, along with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and error corrections.

Considering the pronouncement's objective to improve the relevance and reliability of the entity's financial statements, and, above all, to allow comparability 13 over time with the financial statements of other entities, we draw attention to the need to disclose all information relevant to understanding the adjustments made, including regarding the reasons why the application of a new accounting policy, if applicable, provides reliable and more relevant information.

In this regard, CPC n. 23, in its item 14, states as follows regarding the change in accounting practices:

“14. An entity shall change an accounting policy only if the change:
(a) is required by a Pronouncement, Interpretation, or Guidance; or (b) results in reliable and more relevant information in the financial statements about the effects of transactions, other events, or conditions regarding the entity's financial position and financial performance, or cash flows.”

It is imperative to state that the fact that accounting pronouncements issued by the CPC sometimes allow for the adoption of more than one different accounting practice does not imply that the company's management has the prerogative to migrate from one practice to another, at the whim of changing economic circumstances, opportunistically to meet specific interests. An example of this is investment properties.

CPC n. 28, in its item 31, provides as follows:

“Technical Pronouncement CPC 23 – Accounting Policies, Changes in Estimates and Error Corrections states that a voluntary change in accounting policy should be made only if the change results in a more appropriate presentation of operations, other events, or conditions in the entity's financial statements. It is highly unlikely that a change from the fair value method to the cost method will result in a more appropriate presentation.” (emphasis added)

13 It is important to highlight the structural break in a time series of accounting variables (periods in which practices changed; errors were corrected), so that inferences regarding trends are not compromised, avoiding decisions being taken erroneously.

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that, in their judgment, affect the

Sincerely,

Signed Original

GUILHERME ROCHA LOPES
Superintendent of Corporate Relations
Acting

Signed Original

JOSÉ CARLOS BEZERRA DA SILVA
Superintendent of Accounting Standards and Auditing